Here comes Moody's with a blockbuster which may put China's "White Knight" status, at least as far as Europe is concerned, in grave danger. In a report just released, the rating agency not only warns that China's debt problem is "bigger than stated" (i.e., China is hiding a ton of ugly stuff off the books), but goes ahead to quantify it: "Of the RMB 10.7 trillion (about $1.6 trillion) of local government debt examined by the Chinese audit agency, RMB 8.5 trillion ($1.3 trillion) was funded by banks. However, Moody's has identified another potential RMB 3.5 trillion ($540 billion) of such loans that the Chinese auditors did not discuss in their report….we find that the Chinese audit agency could be understating banks' exposures to local governments by as much as RMB 3.5 trillion." – ZeroHedge
Dominant Social Theme: China has done a splendid job of turning a communist system into a free-market one. Its prosperity is a result. Just look at the numbers.
Free-Market Analysis: Tyler Durden at the ZeroHedge website just came out with an article regarding the untrustworthiness of China's financial numbers (see excerpt above). It's taken from a Moody's release that has found nearly US$2 trillion of Chinese loans may be under water. This corresponds to what we've been reporting (with increasing urgency) over the past two years. You can see our most recent article here, The Coming Chinese Depression. Below is an excerpt from what we wrote:
Of course, the success in our view has been initiated by printing fiat dollars – money from nothing. It is the same "success" that the Western central banks had prior to 2008 and look at how that ended. One cannot grow an economy year after year at nine percent per quarter and expect anything at the end of it but an inflationary depression. Chinese economic statistics are a case of "garbage in and garbage out." And Western power elites must be quite aware of what is going to happen in China eventually. In our view it is a kind journalistic criminality that the mainstream media does not do more to alert the West about what is in store. When the Chinese economy crashes, the rest of the world will not be immune.
How did we know Chinese numbers were junk even before the latest startling revelations? Because China is currently the world's biggest "planned" economy and government numbers ALWAYS lie. China's Western public perception is built on the lie that its communist masters have suddenly become capitalist converts. They have not.
The Chinese economy at its lower levels is one of competitive vibrancy but at the top of the system, power and control is concentrated as always in the hands of only a few. This is analogous to systems in South America (and increasingly in the West, unfortunately), where the masses are free to sell cell phones to each other for vanishing margins all day long. But the larger entities of control, the banks, power stations and big box merchandising outlets are in the hands of a few powerful families, many of them with connections to Anglosphere elites.
It is in fact a kind of dominant social theme – that capitalism has won the day in China and its billions are converts to free-market thinking. They are not. The purpose of proposing this meme in our view is to reinforce the kind of structure that the ChiComs have developed.
If China is seen as a "capitalist" success, then its system is worth emulating. And it is a most authoritarian system. It is one in which a handful of basically unelected, powerful men are gathered together under a stated (incomprehensible) ideology to use the levers of government power to enrich themselves and others around them.
It is a mafia-like approach to the markets. Government generally IS mafia like. It extracts protection money (taxes) to keep people safe from non-existent threats. As threats are not available, those in government usually make them up.
What is not often understood is that one's own government is culpable but so is the government on the other side. The ruling classes inevitably have more in common with each other than they do with the ruled. China's command-and-control economy is most attractive to Western elites that are continually undermining what is left of the West's free-market structure and intellectual history.
Within this context, Western elites and the mainstream media they control have every incentive to cover up the real nature of the Chinese economy for as long as they can. It is something of a propaganda effort. The idea is to instill in people around the world the idea that a command-and-control economy run by a few wise men is a viable and preferable sociopolitical circumstance.
The Moody's China release and Tyler Durden's following commentary provide us with an antidote. Durden believes the rating agencies have found "religion" after being so spectacularly wrong about the economic crisis of 2008 when almost every blue-chip banking entity foundered and fell.
"Of China's $5.8 trillion GDP," Durden writes, "(or whatever imaginary number the Polit Bureau is happy with throwing around for mass consumption), $540 billion is debt that is 'unaccounted for', most likely due to being, well, bad."
Durden also puts it in a US context. "That would be equivalent to saying that $1.4 trillion of US corporate debt is delinquent. And lest anything is lost in translation, Moody's drives the stake through the Dragon's heart: 'Since these loans to local governments are not covered by the NAO report, this means they are not considered by the audit agency as real claims on local governments.'"
And what does that mean? "This indicates that these loans are most likely poorly documented and may pose the greatest risk of delinquency. So let's get this straight: a country which has 10% of its GDP in the form of bad debt, is somehow expected to be credible enough to buy not only Greek debt, but the EURUSD each and every day? Mmmmk."
As we have pointed out many times and with increasingly elevated volume, the Chinese system at the top, where it counts, is a sham. It is a promotion that is being run for a number of reasons, and the Western elites are seemingly complicit.
China is increasingly cast as an enemy of the West, but this is a fairly ludicrous portrayal. China owns more American debt than any other country; and now it has begun propping up Europe as well. Without active Chinese involvement it is safe to say that both Europe and the US would be in considerably worse circumstances (and that's saying a lot).
China's price inflation is stubborn and terrible. Real-estate prices apparently remain basically out-of-control. Prices for basic food items have appreciated dramatically. There is considerable civil unrest now, across the entire country,. though China continually covers it up and the Western mainstream media (of course) does not cover it.
The full weight of Chinese mendacity as regards its economy came clear with its building of so many empty cities, its many empty 10-lane highways and its trans-continental high-speed rail system (now cancelled). The many empty cities are being built, from what we can tell, to "house" excess Chinese population; actually they satisfy the economic goals of local officials who dread missing the economic growth targets that the politburo has set.
On the most mundane level, we think the Chinese promotion was supposed to act like Western ones, drawing in Western cash and resources to enrich the pockets of those behind them. Perhaps the downturn, whenever it comes, is supposed to further increase the grip of the Chinese communist party.
We've often predicted that a Chinese recession/depression will have exactly the opposite effect and may put an end to the current system, though whether it will result in a more energetic free-market system is certainly an open question.
None of the Chinese growth and inflation numbers can be counted on at this point. Inherent in Chinese culture is the need to "save face" and with a boom that has been going on as long as this one, we can only imagine the amount of lies that have been told.
The other day, we pointed out that Western mainstream media is complicit in the meme of the Chinese miracle. Sad to say, the Moody's release did not receive a great deal of play outside of the alternative media. This is in line with what we expected.
At this point, the great Chinese expansion is evidently and obviously a kind of dominant social theme propounded by both Chinese and American elites. The two systems seem increasingly intertwined, with China propping up both America and the European Union.
What's going on in China doesn't seem logical, nor does the mainstream media's response, which still for the most part seems to revolve around a deafening silence. If-and-when the West is blindsided by a Chinese "hard landing," the results around the world will likely be seen as catastrophic.
The Moody's report is just one more piece of evidence that shows us just how questionable and over-optimistic the Chinese story really is. Much of what is reported about China in the West's mainstream press is a kind of fantasy based on over-stimulation of China's economy with torrents of paper money.
China – the entire continent it seems – is in the grip of a gigantic growth bubble. Tomorrow's reality may see that bubble punctured, and the Moody's report is certainly a needle. Likely, it will not be the only one.